Securities Regulation: Cases and Materials, Seventh Edition (Aspen Casebook) by James D. Cox & Robert W. Hillman & Donald C. Langevoort

Author:James D. Cox & Robert W. Hillman & Donald C. Langevoort [Cox, James D.]
Language: eng
Format: epub
Publisher: Aspen Publishers
Published: 2013-03-27T04:00:00+00:00

NOTE

GAAP in the Criminal Case. Simon was invoked in the criminal case arising from the collapse of WorldCom, whose CEO, Bernard Ebbers, ultimately received a 25-year sentence for his role in the largest accounting fraud to date. United States v. Ebbers, 458 F.3d 110 (2d Cir. 2006). Ebbers repeatedly instructed his CFO and other accounting personnel that WorldCom “had to make its numbers,” referring to meeting analysts’ expectations regarding the company’s revenue and earnings growth. To achieve these results, the court found that Ebbers and his staff creatively employed accounting steps to inflate revenues and conceal costs. For example, to boost revenues for a quarter, they included in revenues estimated “underutilization penalties” for certain customers, even though they did not expect these sums would be collectible. The bulk of the financial manipulation was their systematic recording of billions of dollars of operating costs as assets rather than expenses. In appealing his conviction, Ebbers argued that the government should have been required to prove that these actions violated GAAP. Invoking Simon, the court disagreed:

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